Nipper the dog has got off lightly. The little terrier listening to His Master's Voice over a gramophone has survived an overhaul of HMV that promises to ditch old technology and bring in the new.

Out will go old-style promotions using posters and cardboard cut-outs, and crammed racks of DVDs, and in will come digital download hubs, sleeker shelves, gaming stations and smoothie bars.

The music and film chain's first "Next Generation Store" opened in Merry Hill shopping centre in the West Midlands town of Dudley last week and today Tunbridge Wells got its own smaller version of the new look shop.

With CD sales in decline, DVD prices battered by fierce online and supermarket competition, HMV has had to force itself through the most radical rethink in its 86-year history. The business, which began life with a store on London's Oxford Street opened by Sir Edward Elgar in 1921, has been plagued by falling profits as customers opt for the convenience of cheap digital downloads and online CD sellers such as Amazon.

For HMV chief executive Simon Fox, his first year since joining from electricals chain Comet has been packed with homework on a rapidly changing industry.

"We had really lost touch with our customer and the top priority going forward was to make sure we had the customer at the heart of what we do," he said, as he showed reporters round the Dudley store, Lovejuice smoothie in hand.

The fresh juice bar is all part of a plan to entice customers into the store for longer. Sipping on smoothies they can sit at sleek new Apple computers surfing a select number of websites including social networks Bebo, MySpace and Facebook.

A row down from the "social space" are terminals where shoppers scan the barcodes on CDs and DVDs, listen to and watch them and click on a buy button that will deliver a copy to the customers' home for free. The computers will also offer catalogues of tracks to be downloaded straight to memory sticks.

HMV says the whole plan is that however a shopper wants to buy a film or song they should be able to get what they want in its stores.

"The new design reflects the way customers now consume media and the way they spend their time. It's becoming an entertainment store rather than a music and DVD store."

But why have a logo of a dog listening to a gramophone?

Graham Sim, HMV's marketing director, says that is a regular question from analysts. "We have had a couple of people saying would we put him down," he admits. "There's no way we would let Nipper go."

One of the bigger worries for City analysts who toured the Dudley store this week was making sure "entertainment" and being what Mr Fox calls a "place to spend time as well as money" translates into more sales.

Citing the group's own research Mr Fox flags up room for improvement. Surveys by HMV show around 70% of store visitors have "strong" or "moderate" buying intentions but in reality only 25-30% actually purchase something.

HMV wants the new brightly coloured shops, which carry giant plasma screens in place of posters in their windows and touch screens in-store, to chip away at the 28% of non-buyers who currently claim "nothing caught their eye".

Mr Fox hopes inspiring people to buy at least one item thanks to easier to navigate stores divided into areas like "watch", "listen" and "play" will make the economics of the refit work.

At £100 per square foot, it means the price tag on Dudley's store is £800,000. If HMV decides to go ahead with 40 more next generation stores - it will decide after Christmas - the cost will be £20m.

Retail analysts at Kaupthing described the price per square foot as "extremely high" but joined others in the City in welcoming the HMV overhaul.

"This is about as good a step forward as we could have anticipated at this stage," they said.

Nick Bubb at Pali International was more concerned about the fundamentals of HMV's markets.

"Time is not on HMV's side, as the physical markets shrink because of downloading and supermarkets and online players eat away at the High Street specialists. HMV may be the last man left standing, but it is hard to see the upside in the share price at this stage," he said.

Indeed, HMV rival Fopp crumbled under the pressures and went into administration over the summer.

HMV's reaction to falling music sales has been to make music just 25% of what it sells within three years, down from 36% now. But despite that change - which can already be seen in the new store where room is given over to iPod speakers, Rolling Stones bags, Guns 'n' Roses babygrows and mobile phones - Mr Fox insists music shopping is not going to disappear from the high street, nor from HMV.

"Music is our history, it's our DNA," he says.

The entertainment retail industry as a whole is adamant music stores will stick around.

"People tend to forget that 90% of recorded music sales are still on physical formats and there are still the same number of outlets selling music today as there were 10 years ago," says Kim Bayley, head of the Entertainment Retailers Association. "Record stores are going to be with us for a long time to come, but what is clear is that they have to change with the times."